The Issue of Mandatory Social Security Coverage
The question of mandatory coverage – as opposed to voluntary coverage – has surfaced from time to time since the early 1960s. Most recently, the idea of forcing Social Security coverage on State and local governments and their new employees has been advanced by organizations with an apparent bias against public employee retirement benefits – many funded by the Laura and John Arnold Foundation. Among other things, these reports have suggested that current plans don’t work for most teachers; that Social Security offers better protection against inflation; and that expanding Social Security would lessen reliance on state pension plans.
Inherent in most of these reports, is the idea that State and local governments should abandon their defined benefit retirement plans and replace them with a combination of Social Security and a defined contribution plan that shifts all of the risk to individual public employees. Despite the fact that most employees will ultimately be left with a less secure retirement, these reports frequently argue their recommendations are offered to benefit public safety workers, teachers, and other dedicated public employees. They tend to gloss over the true impact on State and local budgets and the inevitable confusion and instability that would result for current and future public employees.
These reports often suggest the Federal government is in a better position to decide how State and local government officials can best manage their public workforce and provide compensation, including disability, retirement, and survivor benefits. However, while the Federal government has struggled to find a way to reform Social Security to preserve its long-term sustainability while meeting the increasing retirement security needs of millions of Americans, most State and local governments have enacted responsible reforms that balance the interests of public workers and the taxpayers who fund the pension promises. Since State and local governments may choose to participate in Social Security, it’s not at all clear why a Federally mandated, one-size-fits-all option would be good public policy.
One report actually suggested the cost of mandatory coverage on State and local budgets “would be trivial.” While we can certainly debate the definition of trivial, a series of independent studies done by The Segal Company – most recently in 2011 – shows the cost to the 50 states would be in excess of $53 billion over the first five years of mandatory coverage. This amount has increased by 100% since the first study was done in 1999. To better understand the impact of mandatory Social Security coverage on one pension system, we’ve highlighted the impact on the California Teachers Retirement System (CalSTRS), the Nation’s largest teachers’ retirement system.
Finally, reports frequently tout the impact that mandatory coverage would have on the long-term sustainability of Social Security; however, a closer look suggests otherwise. In 2013, the Social Security actuaries estimated that extending coverage to all new State and local workers would reduce the deficit by 0.15 percent of taxable payroll over the next 75 years and would extend the life of the trust fund by only one year.
Notwithstanding a series of agenda-driven studies, there are consequences associated with a massive Federal mandate on State and local government. While many may be unintentional, they will have a profound impact on the retirement security of millions of working Americans.
CalSTRS Study Says Mandatory Social Security Would Hurt Schools and Educators
Under a Social Security structure, members´ and employers´ choices would be to pay more or get less.
California public educators and school districts would have to either pay more for their retirement or settle for lower benefits if Social Security were offered to them, according to an analysis conducted by the independent consulting actuary Milliman for the California State Teachers’ Retirement System (CalSTRS).
The study looked at two ways to implement mandatory Social Security for future members: maintain current benefit levels and maintain current benefit cost.
Under the level benefit approach, contributions would jump by up to 12.4 percent of pay, divided up between members and employers. In dollar terms, that amounts to an immediate $1.8 billion annual increase.
Under the level cost approach, members and employers would not pay more, but would see a 33percent reduction in the retirement benefit from current levels. That would reduce the pension’s average replacement of pre-retirement income from 61 percent currently to 43 percent under the new structure.
A separate CalSTRS study compared CalSTRS with 11 other public teacher defined benefit pensions that do not include Social Security. CalSTRS was found to be not overly generous, falling in the middle of the pack, between Texas and Kentucky. The measure was the ratio of replacement of pre-retirement income each plan offered. Texas replaces 58 percent and Kentucky replaces 63 percent of their members’ pre-retirement income.
The Milliman analysis attributes the detrimental impact on CalSTRS members and employers to the divergent designs of the two plans. While Social Security benefits are determined by a formula that pays relatively higher amounts to workers with lower wages, CalSTRS benefits are paid in direct proportion to income.
Based on June 7, 2011 Press Report